Jude Wanniski
September 18, 1997


[European governments face a year-end deadline for satisfying the qualification criteria for monetary union including the size of each country's budget deficit and national debt. Uncertainty about which EU members will be eligible for the euro's scheduled launch in 1999 dominates the European political scene. Amid this turmoil, this "Memo on the Margin" which first appeared last September, serves as a reminder that the EMU project lacks the most basic foundation of a viable common currency: an accepted standard of value.]

September 4, 1996

Letters Editor
Foreign Affairs
58 East 68th Street
New York, N.Y. 10021

Dear Editor:
Rudiger Dornbusch takes several thousand words (September/October, 1996 issue) before concluding that "If there ever was a bad idea, EMU is it." His analysis makes it clear that there can never possibly be a monetary union in Europe, not for a thousand or ten thousand years. It is simply too complicated a problem involving too many economic and political variables. Every participant nation-state has to get its trade deficit just right, its unemployment rate within bounds, its budget deficit low, et cetera.

By these silly measures, there could not possibly be a common currency in the United States. Think how difficult it was for the original 13 colonies to get behind the dollar. Imagine how impossible it might be for 50 separate states to get their trade deficits with each other just right, their unemployment rates within bounds, their individual budget deficits below 3%, et cetera.

Predicting the failure of the EMU is as easy as falling off a log, as long as there is no hard linchpin to bind together the states of Europe without regard to their individual trade and budget flows. More than a decade ago, when he was briefly Chancellor of the Exchequer and visited New York, I advised John Major that monetary union was impossible without gold to act as the referee in disputes among sovereign nations.

Treasury Secretary James Baker in September, 1987, told the International Monetary Fund meeting in Washington that we should all be moving toward a monetary union, with "a basket of commodities including gold" as the reference point by which disputes could be settled. The Wall Street Crash a month later was precipitated precisely because Mr. Baker himself refused to take note of the signals the gold price was throwing off as a warning to the Louvre Accord.

The EMU is in fact a wonderful idea, but it will remain beyond the grasp of Europe's political leaders as long as the United States holds back from its responsibility to re-establish the greenback dollar's link to the planet Earth, by once again defining our unit of account in terms of gold. It is always the responsibility of the primary superpower to do so. It was under the Pax Romana. It was under the Pax Brittanica. It must be under the Pax Americana.

If we were to begin after the November elections to formally stabilize the dollar value of our own monetary gold reserves, we could negotiate a transition to a global monetary system that would tie in Europe and Asia. A target date of January 1, 2000 would not be unrealistic.


Jude Wanniski